Tuesday, January 08, 2013

Megan McArdle sows confusion on health spending

At the Daily Beast, Megan McArdle pooh-poohs the conventional expert wisdom that health care cost growth forms the bulk of our nation's long-run deficit problem. Most of her article is gravely mistaken. She makes (at least) three major errors.

First, McArdle posts the following pie chart:

About which she writes:

As you can see, healthcare is not anything close to our largest spending category; the largest expenditure is on straight transfers to various folks, most of them older.

It's hard to interpret this statement as other than intentionally, deliberately ingenuous. Look at the chart. The "health" slice comprises 10%. The "Medicare" slice comprises 13%. Together they sum to 23%, which is bigger than any other item in the pie chart.

Did McArdle just accidentally omit Medicare from her definition of "healthcare" spending? Did she overlook the small words on the pie chart, and assume that the "Health" slice contained Medicare? No, because in the very same sentence, she refers to "straight transfers to various folks, most of them older." She therefore knows that Medicare is on the chart. She has deliberately chosen not to call it "healthcare" spending. How can this be anything other than intentionally disingenuous? (Well, maybe not: See the update below for an interpretation that does manage to give McArdle the benefit of the doubt.)

Next, McArdle writes:

Democrats and liberal policy wonks have insisted--outright or by implication--that we do know how to get spending levels down to Western European levels: just have the government take over, the way they have in Western Europe...

But it's not even that easy to hold down health care costs, which is why our counterparts in Western Europe are having such trouble doing it. Behold the rate of per-capita cost growth in the OECD from 2004-2010:

The United States is solidly in the middle of the pack--on the low side, in fact...we are far from the top of the heap.

Is it that easy to forget (or deliberately ignore) the difference between levels and growth rates? If health care costs were only 0.0001% of our GDP, would we care even if they were growing at 1000%?

Again, I suspect McArdle of being deliberately disingenuous. She explicitly mentions "levels" when restating the views of others, and in her counterargument she talks only about growth rates. (Also, note that it seems a little disingenuous to compare health spending levels to other budget items while ignoring growth rates, and then compare health spending growth rates to other countries while ignoring levels!)

Finally, McArdle essentially sets up a straw man. She discusses current spending figures, when in fact all the people warning about health care's effect on the national debt are looking more than 10 years into the future. Witness this chart from the CBO:

The CBO projects nearly all future federal spending growth to come from increases in Medicaid and Medicare (the latter of which Megan McArdle apparently doesn't even count as "healthcare" spending!).

Or look at this chart from the Heritage Foundation (the y-axis is % of GDP):

As you can see, Medicare, Medicaid, and "Obamacare" are projected to rise rapidly after 2020, swamping all other budget items (including Social Security, which sees a temporary, gentle rise due to the Baby Boom retirement).

In other words, Megan McArdle has committed three large mistakes when discussing health spending and the national debt. These mistakes are:

1. She does not label Medicare as "healthcare" spending.

2. She uses data on cost growth rates to try to rebut a point about cost levels.

3. She uses only current spending figures, when everyone agrees that the health care deficit problem is going to really bite starting a few years from now.

Bloggers and opinion writers, please take note: If you want to make the case that America's government is spending too much on non-health items, you're going to have to make a better case than this.

Update: a commenter suggested that perhaps when McArdle said that "healthcare is not anything close to our largest spending category", she was comparing it to a combination of all non-health-related transfers. That would definitely be less intentionally disingenuous than the more obvious interpretation of her sentence/chart combination. Note that this would treat Social Security (in which people's benefits are to a large degree proportional to their past contributions), unemployment insurance (which is temporary), and welfare all as the same thing. I leave it to the reader to decide whether this is an appropriate combination.

I'm going to do something I really don't do much and defend Megan McArdle. I think you're misreading her piece on two fronts.

1) That she phrases it "straight transfers to various folks, most of them older" suggests to me she's combing Social Security with "Income Security," which comes out to 36 percent. As you say, "Health" plus Medicare only comes out to 23 percent. I think the point she's making here is that the amount the government spends on bulking up individuals' income is bigger than the amount we spend on health care. I think you can debate how meaningful the point is, but it's clearly accurate.

2) She clearly understands the difference between cost levels and growth rates. The paragraph you cut out in your elipses is pretty critical in that regard: "Western Europe did use price controls to hold down the cost of health care. But the operative words are "hold down"--now [meant "not" I assume] "lower". It is much easier to keep a price from rising than it is to push it down after it's risen. That's why pay freezes are common during a recession, and mass pay cuts aren't."

Her point is that once you've reached a particular cost level, you're basically stuck with it. And that what Western Europe has down is keep the cost level low, not so much hold down growth rates. Which makes their experience of limited usefulness to us, because in our case the damage has been done.

I'm not sure how much I agree with this argument. But I don't think it's disingenuous, and it clearly acknowledges the difference between growth rates and cost levels.

That said, I think the right way to respond to McArdle here is how you did with your third point: Even if our growth rates our already lower than a lot of Europe, we need to lower them even further because our cost levels are already so high. And even though "straight transfers" are bigger than health care spending now, they aren't growing at an unsustainable rate. Health care spending (due to health care costs) is.

Also, note that it's a little disingenuous to compare health spending levels to other budget items while ignoring growth rates, and then compare health spending growth rates to other countries while ignoring levels!

Surely if the USA were to eliminate the rents extracted by health insurers there would be a one-time fall in the cost level?

OT: what's the problem with increasing healthcare costs? As a person get richer, the marginal utility of pretty much everything she could buy declines. Everything, that is, except more time and health to enjoy it all. Which is what healthcare provides (in the brochures, anyway).

Classical microeconomics would seem to predict that beyond a certain level of wealth, healthcare will consume a larger and larger proportion of total spending. (Vying only with insurance and other security services.)

Given that buying more health is what people want to do, individually and in aggregate, why shouldn't they do it? Will the USA collapse because it is too wealthy, or something?

But Noah, I didn't ignore levels. I specifically said that our problem is the level, not the growth rate. The whole point of the post is that we can't easily get to Western European levels even though our growth rate is actually lower. I agree with you that the point would have been even stronger if I'd added a chart about European levels, but you can hardly have taken me to be saying that the US doesn't spend more money than they do on health care.

As for why I broke out spending the way I did, I did it that way because that's how the Federal government does it. I used Table hist03z1 from the OMB, and aside from removing redundant entries that provide extra detail on various spending categories, I presented the data as they do.

I agree that I could have added Medicare to Health, but I assumed that given that they are right next to each other on the graph, people could do that for themselves. That certainly does not mean that I excluded Medicare from my definition of health care spending; if you add Medicare to "health" spending, and even throw in VA benefits (not all of which are healthcare), it is still below cash and quasi-cash transfers, including social security. Whether you think that this is somehow morally appropriate, I think I made it pretty clear what I was talking about.

On your third point, I agree that left unchecked, Medicare + Medicaid + Obamacare will dwarf everything else in the budget. But I was addressing a specific claim that we could substantially relieve our budget problems by getting our health care spending to Western European levels, not writing everything that could ever be said about health care.

But Noah, I didn't ignore levels. I specifically said that our problem is the level, not the growth rate. The whole point of the post is that we can't easily get to Western European levels even though our growth rate is actually lower.

If we could continue to hold our growth rate below that of Europe, the levels would equalize eventually; that's just simple math.

you can hardly have taken me to be saying that the US doesn't spend more money than they do on health care.

Nor did I. I just thought the segue about comparative cost growth rates was a complete distraction from the important points, which were A) the level differences (which provide a hint that there are cost savings to be had in the U.S. without reducing actual care received), and B) the effect of currently projected U.S. cost growth rates on the U.S. long-run budget deficit.

I agree that I could have added Medicare to Health, but I assumed that given that they are right next to each other on the graph, people could do that for themselves. That certainly does not mean that I excluded Medicare from my definition of health care spending; if you add Medicare to "health" spending, and even throw in VA benefits (not all of which are healthcare), it is still below cash and quasi-cash transfers, including social security.

This was just not made clear in the post at all. If you want to compare composite categories (such as SS + unemp. ins. + welfare) that you make up, that's fine, just state what those categories are. The category of "non-health transfers" is not on the list in either of your charts, and nowhere did you explicitly define it; this is very confusing to the average reader.

So no, I think it was not at all clear what you were talking about.

On your third point, I agree that left unchecked, Medicare + Medicaid + Obamacare will dwarf everything else in the budget.

And that is precisely what everyone means when they say that "the deficit problem is a health care cost problem". They are talking about >5 years in the future, not current conditions.

But I was addressing a specific claim that we could substantially relieve our budget problems by getting our health care spending to Western European levels

That was not the main thrust of the post at all; that was one (unsupported) assertion buried in the middle of the post. The main thrust of your post was that health care spending is not the vast majority of the U.S. spending problem - which, at a horizon of >5 years, it most certainly is (assuming cost growth trends continue, which we should work to ensure they do not).

Yes, if we hold down our growth rate to below Europe's, we will eventually equalize the rates. But not necessarily at a level where spending isn't a problem.

It's true that I didn't add things up in the chart. However, you took issue with what I wrote--and what I wrote is that we spend more on transfers than health care. I'm sorry that it wasn't clear to you, but I'm hard put to see how I could have written it more clearly.

Health care cost growth (rather than coverage expansion) is not the main problem at the >5 years point; it's the main problem at the >15 years point. Our immediate problem is enormous bulge of old people and slow economic growth.

As for your rather breathtaking assertion that you know better than I do what the point was of something I wrote, I can only suggest you go back and read the post. There are four sentences about what you claim is "the main point". There are then many paragraphs about the difficulty of getting our healthcare costs down to European levels, and what that means for spending. There is no reasonable reading of that post which concludes that the point was that healthcare is not a spending problem.

Yes, if we hold down our growth rate to below Europe's, we will eventually equalize the rates. But not necessarily at a level where spending isn't a problem.

...So what? The point is that if health spending grows fast enough, no reductions in non-health spending will be able to compensate, and the budget will be overwhelmed. Thus, at a time horizon of greater than 5 years, what we have is a health spending problem, not a general spending problem, contrary to the main point of your post.

It's true that I didn't add things up in the chart. However, you took issue with what I wrote--and what I wrote is that we spend more on transfers than health care. I'm sorry that it wasn't clear to you, but I'm hard put to see how I could have written it more clearly.

Well, you could have given an actual number for the category you made up. "If we add Social Security, unemployment insurance, and welfare-type transfers, we get around 36% of the budget, far larger than the 23% represented by health care spending", etc. etc.

See?

Health care cost growth (rather than coverage expansion) is not the main problem at the >5 years point; it's the main problem at the >15 years point.

Not if you believe that Heritage Foundation chart. According to that chart, we can expect to see a gentle and temporary rise in Social Security spending as Baby Boomers retire over the next 10-15 years, a steep, unbounded rise in health care spending (including coverage expansion) beginning essentially immediately, and a steep and immediate fall in all other forms of spending, followed by a continued gentle decline.

The point at which health becomes the key factor is not the point at which health spending is numerically larger than non-health spending, but the point at which the dollar growth in health spending exceeds the dollar growth of the maximum feasible cuts to non-health spending.

As for your rather breathtaking assertion that you know better than I do what the point was of something I wrote, I can only suggest you go back and read the post.

Oh, I have. Several times. I find it...rather breathtaking.

There are then many paragraphs about the difficulty of getting our healthcare costs down to European levels, and what that means for spending.

No, there are not. You state (without evidence) that real health costs cannot grow at negative rates (this is an argumentum ad verecundiam sui). You then compare U.S. and European rates of health cost growth, which (as I have noted repeatedly) tells us absolutely nothing about the feasibility of reducing our health costs, either to European levels or to non-dangerous levels.

What you have done in this column, it seems to me, is to begin from your prior belief that non-health spending needs (and can get) steep cuts. You then went looking for evidence that seemed vaguely in concert with this prior belief, and, without thinking too hard about whether any of these facts really supported the case you wanted to make, slapped them together end to end.

It didn't end up making a coherent case, but you are too angry and combative to think clearly enough to realize that.

Which I suppose is my fault, for taking a combative tone in my post, making you feel the need to defend yourself. It is only natural. I suppose I should take a more constructive, friendly tone when I write these things.

RE: McArdle interpretation. Isn't it incumbent on professional writers of whatever political persuasion or stripe to ultimately communicate to readers what it is they mean?If McArdle is to receive the benefit of the doubt it is her responsibility to say what she means to say and not present a ramble that requires squinting, head scratching and soul searching on the part of the reader even when discussing the finest small skillets, finest kitchen appliances, and the pernicious nature of poor people to make one feel ill at ease and resentful at the same time.

Isn't it incumbent on professional writers of whatever political persuasion or stripe to ultimately communicate to readers what it is they mean?

Yes, of course. It's very easy to write a confusing post that's basically a Rorschach test, slap on a title and some opening sentences that appeal to an ideological faction, and then answer all critics with "You're misrepresenting what I said, obviously you didn't read my post carefully."

Hey Noah, on the issue of disingenuousness (disingenuity?), you neglected to comment on McArdle's first graph -- the bar graph that appears right above the pie chart. It seems even more misleading, and does not break down the percentages of each item to allow the reader to make the corrections. Hard to see what this graph is doing in there, if not to mislead. And it's the first graph she shows.

That she phrases it "straight transfers to various folks, most of them older" suggests to me she's combing Social Security with "Income Security," which comes out to 36 percent. As you say, "Health" plus Medicare only comes out to 23 percent. I think the point she's making here is that the amount the government spends on bulking up individuals' income is bigger than the amount we spend on health care. I think you can debate how meaningful the point is, but it's clearly accurate.

Um...Giving McArdle the benefit of the doubt, and assuming that this is in fact what she meant (which is not at all obvious to me!), the point is still a bad one, because a lot of S.S. is not net transfers (because benefits are proportional to past contributions). So it doesn't make a lot of sense to combine the two and call them "straight transfers".

(Also, note that her chart is from 2007, here's one for the proposed 2013 budget: http://nationalpriorities.org/media/uploads/publications/presidents_budget_fy2013/chart_3.jpg)

She clearly understands the difference between cost levels and growth rates. The paragraph you cut out in your elipses is pretty critical in that regard: "Western Europe did use price controls to hold down the cost of health care. But the operative words are "hold down"--now [meant "not" I assume] "lower". It is much easier to keep a price from rising than it is to push it down after it's risen. That's why pay freezes are common during a recession, and mass pay cuts aren't."

Her point is that once you've reached a particular cost level, you're basically stuck with it. And that what Western Europe has down is keep the cost level low, not so much hold down growth rates. Which makes their experience of limited usefulness to us, because in our case the damage has been done.

Nope, still makes no sense. Even if cost growth can't go below zero (which is silly btw, since these are real costs, not nominal), a country with way above-average costs would still be advised to hold cost growth far below that of the countries that spend less, not just be in the middle of the pack.

Nice try, always good to be a devil's advocate, but McArdle is still making terrible arguments...

I am a bit puzzled by this point. As you no doubt know, social security is only weakly proportional to earnings; its progressivity, which transfers money from higher earners to lower, is in fact one of the usual selling points of the program. Moreover, it's hardly some strange, innovative usage to call Social Security a transfer program; that's what the Census calls it.

I am also not sure why you think it is a point of contention that countries with above-average levels should try to hold down cost growth. Ceteris paribus, I think everyone should try to hold down cost growth, though not (there's the rub) where the cost benefit analysis dictates costs should grow. I certainly didn't argue that we shouldn't try for lower cost growth.

Rather, I argued that it's very hard to achieve negative real cost growth, particularly at rates that would get us near European levels of spending. I made a positive argument. You are quarreling with a normative one.

I am also not sure why you think it is a point of contention that countries with above-average levels should try to hold down cost growth.

I'm not sure what this sentence is trying to say. U.S. health care costs are much higher than other rich-country costs; therefore, if U.S. cost levels are to fall back in line with other rich-country levels, U.S. cost growth must lag behind other rich countries' cost growth.

Now, costs = prices * quantity consumed, so if prices could fall without quantity consumed being affected, that would be optimal. There seems no strong evidence to me that real health care prices cannot go down.

Rather, I argued that it's very hard to achieve negative real cost growth, particularly at rates that would get us near European levels of spending.

I am not sure why you are engaging in these arithmetic exercises. I never denied that holding down costs would be better than not holding down costs. You are not arguing with me. You are just . . . doing arithmetic.

So I do not see the point of your exercise. It seems like a fruitless segue, sowing confusion among readers, but proving no relevant point.

It seems like a pretty straight forward exercise among the libertarians and right wingers. The point of the exercise is to show that we have a spending problem and that government managed health care doesn't work at controlling cost. It is the standard libertarian argument, albeit a wrong one.

Despite Megan using this argument to claim that we have a spending problem, spending has slowed substantially, spending on goods and services is actually down, and we have record low public employment as a ratio of public employment to population.

A significant part of the current deficits is cyclical, not structural. Megan actually wrote a piece about cyclical vs structural deficits back in 2009, but arrives at the opposite conclusion and who did she blame? FDR and LBJ.

It is just pure hogwash to claim that our current deficits are largely structural and FDR and LBJ are at fault. Of she attacks LBJ, FDR, and social programs, despite the fact that structural deficits started to show up during the Bush administration due to his tax cuts and wars.

She is your classic example of a right wing libertarian who places ideology before facts. Even though I keep up on current events and economics, I haven't heard much of Megan McArdle before. Reading some of her material and a simple google search shows that she is an ideology pusher.

Noah: "So I do not see the point of your exercise. It seems like a fruitless segue, sowing confusion among readers, but proving no relevant point." I think you are being too kind here. It most certainly proves the relevant point that McArdle/Jane is purposefully lying. As someone else noted earlier, the way her argument is presented, she's obviously not stupid.

Come on, you know better than this! SS benefits are not proportional to past contributions as crediting is a step function. I assume that's what you meant by "a lot" but you have no need to use the word "proportional", which implies at a constant rate (I know I defined direct proportionality, but that's what any reader would take it to mean in context). That just contributes to the public's confusion on this issue.

How about quantifying what you think is transfer versus forced savings? Skeptics would have reason to think any fraction is potentially too high because the size of the benefit, indexation, tax status and eligibility are all subject to change and, given the long run funding problems, are likely to move against the currently employed. That's why I think it’s more appropriate to think of it as an intergenerational transfer payment. Current recipients are relatively certain what they will receive (actuarially, I mean) since most of the changes would not touch them or would impact them for shorter periods, while those distant from retirement only know what they are paying today and see the future as genuinely and appropriately uncertain.

Am I an idiot to believe that current spending levels and level growth would probably be sustainable if the US switched to an open border emigration policy (with some caveat about new emigrants not being able to claim welfare for the first 5-10 years they are here) to attract young ambitious emigrants who will pay lots of future taxes?

Often, discussions about such as this one tend to end up focused on the meaning of individual phrases. That's useful in itself, but we also need to remember the broader question. Are we being offered cheap baloney? Here, I think it's pretty obvious that McArdle is trying to get us to believe something that isn't obviously true. To give her the benefit of the doubt (a grand and generous gesture on our part, I might add, given McArdle's record), there is some chance her point of view may turn out to be the correct one, but that means truth has yet to be discovered. If McArdle is trying to demonstrate that her view is likely to be true, rather than merely trick us into thinking her view is true, why would she craft her argument the way she has? The flaw Noah points out stand as evidence that McArdle doesn't know how to demonstrate that her view is likely to be true. Even granting that her view has some probability of being correct, all she has done is offer an argument that might trick us into believing her view.

The one remaining question is whether one could make the argument that McArdle has made, with all its errors, merely as the result of being confused. That is to say, when someone makes an argument this wrong, the choice comes down to whether that someone is dishonest or stupid. This is a fairly elaborately constructed argument. It shifts from one convenient error to another. That suggests a fairly good grasp of the subject material. You have to know what you are doing to get the argument wrong in this particular way.

So, without any prejudice regarding the actual state of the world, we can conclude that McArdle is being dishonest. It may be possible to find a defense for any individual point she made, though it helps to close one eye and squint really hard with the other. Her argument as a whole, though, is simply to elaborately misleading to be anything other than a direct attempt to mislead. "Disingenuous" is kind. McArdle is lying. She's doing it with math, but that doesn't change the basic fact that she's lying.

I'm not sure why anyone would bother to argue with Ms Mcardle, who seems to think that if you are contrary you are right, but Noah, you seem to ignore the rules of argumentation: be brief, go for the jugular, be clear.That whole first bit about the pie chart - it is irrelevant to the main argument (future share of costs) and the chart is almost impossible to read on your blog, due to the way you cut and pasted.

A much better post on your part would have focused on one specific clear issue: current projections show healthcare growing to a large part of our economy.

This is all that is important

The rest is arguing around the edges

so....you and megan agree !!!!The problem is the future cost of healthcare !!!!

and, the problem is this is NOT, repeat NOT a problem for economists - it is a technology issue; there is absolutely no reason whatsoever that we can't DRAMATICALLY reduce healthcare cost.For instance, why does an $$, highly trained nurse need to take your blood pressure ?Why does a highly paid MD need to deliver a shot ?etc (not to mention, if we put a bit more in the NIH, and had hi res NMR strutures of all human proteins, and good in silico docking software, we could DRAMATCIALLY lower the cost of healthcare

this whole blog post is stupid; and I'm jsut as stupid, ignoring my own rules and writing a long diffuse answer

I hope you enjoyed your interaction with Our Megan, Noah. It's a bit like wrestling a greased pig, isn't it? No matter what you do, you don't seem to have any success and the pig barely notices. I just want to defend our special young woman against these scurrilous charges that somehow she's deliberately selling out her talents in return for cash from some avuncular old men. I concede that she's taking money in exchange for doing what they ask, but I suspect it's a bit like the situation among young Cuban women as described by a younger Fidel Castro - she's not doing it because she is forced to, but because she really loves doing it. In other words, Our Megan is not a corporate shill; she is simply a very stupid person. If you read her little essays with the view that she's merely repeating buzzwords and catch-phrases which don't actually make much sense to her, everything suddenly becomes much more clear. It's pointless to argue with her - she is incapable of understanding what you are trying to say. I think the infamous Barbie that said "Math is hard!" must have been designed by one of her family members or close personal friends. Perhaps the next time she visits (she does seem to have a thin skin for such an insensitive person, oddly), you might be better advised to treat her as you would a somewhat spoiled and rather unintelligent 6-year-old: pat her on the head, tell her she looks very nice, and send her home. Maybe give her a nice lollipop or stuffed animal or something.

The entire medical care is all messed up. It has been clear to me without even reading this post. I can both agree and disagree with Meagan. It all depends from which angle you are looking at her charts and her words in general. Honestly, no matter how we argue here, nothing depends on us. Unfortunately we are not the ones who can do something about it. It is obvious that the country is going down. Spending is the problem. Economic growth (if there is any at all) is the problem. People taking out paydayloans in order to afford health insurance is the problem. The list may last forever. Thanx a lot, Noah, for letting us read another point of view